Valuation of Future Cash FlowsPART 3award to cover the following: (a) The present value of two years' back pay.The plaintiff's annual salary for the last two years would have been $44,000and $47,000, respectively. (b) The present value of five years' future salary.You assume the salary will be $51,000 per year. (c) $200,000 for pain andsuffering. (d) $25,000 for court costs. ASsume that the salary payments areequal amounts paid at the end of each month. If the interest rate you chooseis an EAR of 7 percent, what is the size of the settlement? If you were theplaintiff, would you like to see a higher or lower interest rate?59. Calculating EAR with Points You are looking at a one-year loan of$15,000. The interest rate is quoted as 12 percent plus two points. A pointonloan is 1 percent (one percentage point) of the loan amount. Quotessimilar to this one are common with home mortgages. The interest ratequotation in this example requires the borrower to pay two points to thelender up front and repay the loan later with 12 percent interest. What ratewould you actually be paying here?LO 460. Future Value and Multiple Cash Flows An insurance company is offeringa new policy to its customers. Typically, the policy is bought by a parent orgrandparent for a child at the child's birth. The details of the policy are asfollows: The purchaser (say, the parent) makes the following six payments tothe insurance company:LO 1First birthday:Second birthday:Third birthday:Fourth birthday:Fifth birthday:Sixth birthday:$ 800$ 800$ 900$ 900$1,000$1,000After the child's sixth birthday, no more payments are made. When the childreaches age 65, he or she receives $150,000. If the relevant interest rate is10 percent for the first six years and 5.75 percent for all subsequent years,is the policy worth buying?.1 Annuity Future Value The Federal Reserve Bank of St. Louis has files listingistorical interest rates on its website www.stlouisfed.org. Find the link for "FREDFederal Reserve Economic Data). You will find listings for Moody's Seasoned Aaaorporate Bond Yield and Moody's Seasoned Baa Corporate Bond Yield. (These ratese discussed in the next chapter.) If you invest $2,000 per year for the next 40 years ate most recent Aaa yield, how much will you have? What if you invest the same amount

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Asked Nov 4, 2019
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Valuation of Future Cash Flows
PART 3
award to cover the following: (a) The present value of two years' back pay.
The plaintiff's annual salary for the last two years would have been $44,000
and $47,000, respectively. (b) The present value of five years' future salary.
You assume the salary will be $51,000 per year. (c) $200,000 for pain and
suffering. (d) $25,000 for court costs. ASsume that the salary payments are
equal amounts paid at the end of each month. If the interest rate you choose
is an EAR of 7 percent, what is the size of the settlement? If you were the
plaintiff, would you like to see a higher or lower interest rate?
59. Calculating EAR with Points You are looking at a one-year loan of
$15,000. The interest rate is quoted as 12 percent plus two points. A pointon
loan is 1 percent (one percentage point) of the loan amount. Quotes
similar to this one are common with home mortgages. The interest rate
quotation in this example requires the borrower to pay two points to the
lender up front and repay the loan later with 12 percent interest. What rate
would you actually be paying here?
LO 4
60. Future Value and Multiple Cash Flows An insurance company is offering
a new policy to its customers. Typically, the policy is bought by a parent or
grandparent for a child at the child's birth. The details of the policy are as
follows: The purchaser (say, the parent) makes the following six payments to
the insurance company:
LO 1
First birthday:
Second birthday:
Third birthday:
Fourth birthday:
Fifth birthday:
Sixth birthday:
$ 800
$ 800
$ 900
$ 900
$1,000
$1,000
After the child's sixth birthday, no more payments are made. When the child
reaches age 65, he or she receives $150,000. If the relevant interest rate is
10 percent for the first six years and 5.75 percent for all subsequent years,
is the policy worth buying?
.1 Annuity Future Value The Federal Reserve Bank of St. Louis has files listing
istorical interest rates on its website www.stlouisfed.org. Find the link for "FRED
Federal Reserve Economic Data). You will find listings for Moody's Seasoned Aaa
orporate Bond Yield and Moody's Seasoned Baa Corporate Bond Yield. (These rates
e discussed in the next chapter.) If you invest $2,000 per year for the next 40 years at
e most recent Aaa yield, how much will you have? What if you invest the same amount
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Valuation of Future Cash Flows PART 3 award to cover the following: (a) The present value of two years' back pay. The plaintiff's annual salary for the last two years would have been $44,000 and $47,000, respectively. (b) The present value of five years' future salary. You assume the salary will be $51,000 per year. (c) $200,000 for pain and suffering. (d) $25,000 for court costs. ASsume that the salary payments are equal amounts paid at the end of each month. If the interest rate you choose is an EAR of 7 percent, what is the size of the settlement? If you were the plaintiff, would you like to see a higher or lower interest rate? 59. Calculating EAR with Points You are looking at a one-year loan of $15,000. The interest rate is quoted as 12 percent plus two points. A pointon loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 12 percent interest. What rate would you actually be paying here? LO 4 60. Future Value and Multiple Cash Flows An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: LO 1 First birthday: Second birthday: Third birthday: Fourth birthday: Fifth birthday: Sixth birthday: $ 800 $ 800 $ 900 $ 900 $1,000 $1,000 After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $150,000. If the relevant interest rate is 10 percent for the first six years and 5.75 percent for all subsequent years, is the policy worth buying? .1 Annuity Future Value The Federal Reserve Bank of St. Louis has files listing istorical interest rates on its website www.stlouisfed.org. Find the link for "FRED Federal Reserve Economic Data). You will find listings for Moody's Seasoned Aaa orporate Bond Yield and Moody's Seasoned Baa Corporate Bond Yield. (These rates e discussed in the next chapter.) If you invest $2,000 per year for the next 40 years at e most recent Aaa yield, how much will you have? What if you invest the same amount

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Expert Answer

Step 1

Calculation of future value of payments:

Answer:

Future value of payments is $185,360.20; the policy is not worth buying.

Step 2

Excel workings:

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Future value Years Cash flows FVIF@10% 0 1.772 S800 $800 $900 $900 $1,000 $1,000 1.611 $1,288.41 1 1464 $1,171.28 $1,197.90 $1,089.00 $1,100.00 $1,000.00 1.33 4 1.210 5 1.100 6 1.000 Total value after 6 years $6,846.59

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Step 3

Excel spread sheet:

...
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A В Years Cash flows FVIF a 10% (1.16 (1.1)5 |=(1.1)^4 |=(1.1)^3| |-(1.1)'2 |=(1.1)^1. Future value 2 0 800 800 -В3*С3 3 1 4 2 -B4*C4 900 900 -B5 C5 -B6*C6 |-В7*С7 -B8*CS 5 3 6 4 7 5 1000 1 8 6 1000 9 Total value after 6 years -D3+D4 + D5 + D6+D7+D8 10

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